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The U.S. Federal Communications Commission (FCC) has approved the multi-billion dollar merger of America Online Inc. and Time Warner Inc., FCC Chairman William Kennard announced late Thursday at a press conference in Washington, D.C.

Kennard described the AOL, Time Warner merger as a “marriage of old and new media” which raised new challenges for policy making.

The FCC’s approval of the deal, which is currently valued at US$94 billion, comes with conditions designed to protect consumers from the very large and potentially dominant company that AOL Time Warner Inc. is set to become.

The conditions relate to three main areas – the issue of openness in the high-speed Internet access market, ensuring a good level of competition in the market for instant messaging services, and the terms of existing business ties between AT&T Corp. and Time Warner.

“This is clearly a merger of convergence,” Kennard said, which could bring benefits to consumers through the creation of new products and services. He added that he believed the FCC had struck the right balance between protecting market and consumer interests and not imposing too many conditions on the merger.

Kennard said the approval of the merger was a unanimous decision by the FCC commissioners, although two commissioners wanted no conditions imposed on the deal.

AOL and Time Warner announced their plan to merge almost exactly a year ago today, on Jan. 10, 2000. The marriage will create an Internet and entertainment powerhouse boasting 119 million paying subscribers around the world, made up of AOL’s online members and subscribers to Time Warner’s cable services, magazines and other media.

On the issue of high-speed Internet access, Kennard said the conditions imposed by the FCC go “a bit further” than those applied by its colleagues at the U.S. Federal Trade Commission (FTC), which granted its own approval to the merger Dec. 14. The FCC has “plugged some of the holes” left by the FTC’s conditions, he said.

Kennard listed four conditions aimed at giving competing independent ISPs (Internet service providers) who are using AOL Time Warner’s cable platform a fair chance in the broadband services market.

First, AOL must ensure that competing ISPs can control the first screen that pops up on a consumer’s computer, Kennard said. Secondly, there must be a direct billing relationship between unaffiliated ISPs and their customers. Thirdly, rivals ISPs who use AOL Time Warner’s cable platform must be guaranteed an equal level of performance as AOL Time Warner’s ISP affiliates. Finally, “we want to ensure that these contracts are fair and that the FCC can review them,” Kennard said.

Turning to instant messaging (IM), Kennard noted it was a hugely popular application, with the FCC “concerned to create an open, competitive environment” for the technology. Of vital importance is the interoperability of the “names and presence database … an essential component for any company” in the market, he said. The database is effectively a system of phone numbers that all IM players need access to in order to be able to communicate with each other, Kennard explained.

He set out two possible ways for AOL to act in order to ensure that it doesn’t use Time Warner’s cable networks to extend its dominance today in text-based instant messaging into new, “advanced” IM services that will include multimedia components such as videoconferencing.

AOL must either back an industry-wide standard on “server-to-server interoperability,” or enter into contracts with IM competitors. In that second scenario, AOL must have entered into at least one such contract at the time it enters the advanced IM business, followed by two more contracts with rivals 180 days later. Such conditions will enable the FCC to ensure there are at least three other players in the advanced IM market, the commission said.

The fact that AT&T Corp. has an “existing ownership issue” with Time Warner Entertainment was troubling, since the pair are the number one and two cable operators in the United States, Kennard said. The FCC looks for AT&T to dispose of its interest in TWE and is imposing some conditions to ensure there’s no anticompetitive behavior between AT&T and TWE, he added.

In the area of interactive television, the FCC “had a very long hard look” at the market and the implications the merger between AOL and Time Warner might have, but determined not to impose any conditions at the moment. However, the FCC will continue to watch that market in case the body needs to intervene at some point in the future.